MARC AFFIRMS SPORTS TOTO MALAYSIA SDN BHD’S RM800 MIILION MTN PROGRAMME RATING AT ‘AA-’

Jul 29, 2011 -

MARC has affirmed its AA- rating on Sports Toto Malaysia Sdn Bhd’s (Sports Toto) Medium Term Note Programme (MTN) of up to RM800 million with a stable outlook. Maintenance of Sports Toto’s rating is premised on the strong cash flow generating ability of its gaming operations and its entrenched market position in Malaysia’s numbers forecast operations (NFO) industry. MARC notes Sports Toto’s longstanding operational track record and its ability to respond to competitive threats in the gaming industry by varying prize structure and offering new variations to its games. Nonetheless, MARC notes a slight weakening in its market share in recent years. Moderating Sports Toto’s credit strength is a high dividend payout policy which constrains cash retention at the company level and exposure to regulatory risk, including the potential impact of changes in gaming taxes.



Sports Toto is a wholly-owned subsidiary of Berjaya Sports Toto Berhad (BToto), a member of the Berjaya group of companies and is one of a select few licensed gaming companies offering number forecast operations (NFO). Sports Toto has the largest branch network among its peers and offers the highest number of games. At the same time, MARC takes note of the competitive inroads that its nearest rival, Magnum Corporation Berhad, has made into its leading market share with its 4D jackpot game introduced in September 2009. Sports Toto responded to this competitive challenge by introducing an identical game on June 9, 2011, the earnings impact of which has been positive and would be visible to a greater extent in fiscal 2012 earnings.

For financial year ended April 30, 2011 (FY2011), Sports Toto posted a flat revenue while pre-tax profit declined by 11% year-on-year (FY2010: -4.9%). In addition to the stiff competition, the company’s weaker financial performance is attributed to the higher pool betting duty of 8% introduced in June 2010 from 6% previously. Operating profit margin fell to 15.2% in FY2011 (FY2010: 16.6%). The recent imposition of higher pool betting duty and the annual licence renewal process underscore MARC’s concern that NFO players will continue to be susceptible to government regulatory risk. However, MARC believes that licence renewal risk is somewhat mitigated by Sports Toto’s longstanding operational track record. MARC believes that the sizeable tax revenues generated by the NFO gaming segment lessen the risk of unfavourable government policy shifts. MARC notes that following the pool betting duty hike of 2%, the government had acceded to a reduction in prize structure for a specific prize category, which has helped NFO players mitigate the impact of the duty hike on profit margins.

Sports Toto retains a strong level of cash generation ability as reflected by cash flow from operations (CFO), which remained a resilient RM340.4 million in FY2011 from RM405.4 million in FY2010. MARC expects the strong liquidity position to be maintained in the near-term given the lack of upcoming short-term obligations or major capital expenditure. The company has drawn down RM550 million under the RM800 million MTN facility, of which RM380 million was utilised to retire the debt of its holding company, BToto. MARC observes that significant intercompany loans to BToto have been a recurrent feature of Sports Toto’s balance sheet, constituting about 60.8% (or RM742.7 million) of its total asset composition as at unaudited FY2011 (FY2010: 61.9% or RM529.8 million). Under the terms of the MTN issuance, any new loans to holding companies are to be structured with acceptable repayment schedules that support timely repayment of the notes.

Sports Toto continues to maintain a high dividend payout policy; dividends paid amounted to 149.3% of its unaudited profit after tax of RM342.4 million in FY2011 (FY2010: 69.9%). Sports Toto’s debt service cover ratio (DSCR) of 5.62 times as at FY2011 (FY2010: 2.72 times) provides a comfortable covenant compliance headroom vis-à-vis the minimum covenanted level of 1.50 times. Nonetheless, MARC notes that the strong DSCR was achieved in FY2011 in the absence of any debt repayment. While there are no debt repayments due under the MTN facility until 2013, MARC expects dividend payouts to be at levels which would allow Sports Toto to preserve prudent levels of cash.

The stable rating outlook takes into consideration MARC’s expectations that the company’s credit profile will remain in line with the current rating band.

Contacts:
Darrell Lim, +603-2082 2261/ darrell@marc.com.my ;
Rajan Paramesran, +603-2082 2233/ rajan@marc.com.my .